How to Trade and How NOT to Trade
I have selected the rather generic title, How to Trade, because I am covering a lot of my most treasured stock trading secrets and stock trading ideas and these ideas may seem unusual to many and may in fact defy conventional categorization of stock trading methodology. So I have used the most generic title I could think of.
My ideas about trading do not fit in with conventional thinking about how to trade nor do I fit in with conventional traders. But if you want to pick up some invaluable information about how to trade stick with me throughout this long article and you will not be disappointed.
In this article I will disclose fully a critical theory of stock market behavior. And I will debunk “The Atomic-Bomb- Instruction-Book theory” of market behavior. And finally I will disclose fully, highly profitable programmable stock trading systems along with an explanation of the theory that makes them profitable. This article is a must for any frustrated small stock investor.
DIRTY LITTLE SECRETS
At the outset I am going to let you in on a dirty little secret that has less to do with how to trade than it does to how NOT to trade. Of all the forces in the economy that have caused people to lose money in the stock market, none have been greater than the advice of financial experts and brokers. Brokers and most financial advisers could care less about your financial well being and if you follow the advice of these people it is highly unlikely that you will do anything more than contribute to their salaries and retirement.
We may be hurting but believe me Wall Street is still very fat and still a little stupid.
These Wall Street fat cats are the same people that put much of the world’s economy in the toilet in 2008. But of course the Wall Street Fat Cats had followers and there were a lot of people willing to listen to the advice of these morons also.
But that is all history now. The good news is that in 2015 is that the market has recovered and we have had a full blown bull market for nearly five years. Yeah things got a little rough in the summer of 2015 ( see the crash of 8-24-15) but as recently as early September 2015 I woke up to this on one of my screens for a managed account (click this image to enlarge):
Trading is good and the economy will certainly recover. And this is a great time for stock market investment. It is time for the little guy to take revenge. When I took this screen shot I was using a system called JORDI, but you do not need to buy my software to do good. Just keep reading.
DO IT YOURSELF (see Stock Investors)
If you want to make money in the stock market you need to do it yourself. So how do you do it yourself? Do you need to study companies and economics or, God help us all, technical analysis? Emphatically I say no. All you need to make it in this market is a simple automated trading approach to investing and the discipline and willingness to follow your ideas.
I have been trading automated trading systems for nearly 20 years and starting with practically nothing I have made a pile. I do not know the names of the companies I trade and the only thing I care about concerning brokers is that I pay them the bare minimum for transaction costs. The subject of technical analysis puts me to sleep.
I should also define what I mean by automated stock trading. I am not talking about turning your order execution over to a computer. What you turn over to a computer is the decision making process, to buy or sell a given market, but you are still going to manually execute the order. Executing the order manually may be central to the success of our trading methodology .
DOES HOW TO TRADE HAVE TO BE AS COMPLICATED AS AN INSTRUCTION BOOK FOR BUILDING AN ATOM BOMB?
What brokers, market advisers and a lot of other well meaning people want you to believe is that market behavior is extremely complicated and that the description of any truly profitable automated stock trading system that purports to predict market behavior AND that makes money would, in theory, be equivalent to an instruction book for building an atom bomb.
I know a lot of people that have attempted to become winning traders who have mirrored this kind of thinking in their search for profitable automated trading systems. Let me tell you a true story:
I knew a brilliant engineer whose creative engineering ideas had made him very wealthy. But just being wealthy and being a great engineer did not satisfy him. This brilliant engineer wanted to write the definitive mathematical formula to predict all market behavior. He was understandably confident of his math skills and he expected to be able to do this with a formula that might run 50 pages or more.
The man actually interviewed me as a potential employee and associate. What I remember most about my interview was our discussion of the necessity of securing his home from attacks. Once the world realized that we had the formula to predict all market behavior we would have to secure his property with walls, electrified barbed wire and armed guards. We would, after all, be holding secrets that would allow us to take over the financial world and as such our secrets were of greater interest to hostile elements than national military secrets. We would in effect become a financial nuclear power.
This man was not crazy; he was brilliant. But I did not go to work for him and I nevertheless might have dismissed him and this incident had I not met other brilliant people who seemed caught up with the same idea. And that idea, the idea that it was possible to find the Holy Grail that could predict all market behavior, also included the necessity of fortifying the traders home against outside attacks and intrusions.
THE MOST IMPORTANT HOW TO TRADE RULE
So in order to give you a taste of what I, a successful trader, think about market secrets, I am going to publish in this article and in the printed word you are presently reading, my very accurate formula for predicting market behavior.
This description however will be best understood with a demonstration. You will first need to find a large yard or perhaps a park with soft green grass. Take a tennis ball to the park along with a pen and note book. First look 360 degrees around where you are standing and then write in the note book where the ball will land when you throw it. Now close your eyes and start twirling around and around until you feel you are about to fall. Then just before you collapse to the ground throw the ball hard as you fall. Now open your eyes and note where the ball has landed and compare this with the prediction that you wrote in the notebook.
Now you have just discovered the most important rule of market behavior. All market movement is predominantly random. Only a small part of market movement is non random and hence only slightly predictable. (see Stock Market Price)
So my brilliant engineer friend is not going to be able unlock the secret of market movement with PHD level mathematics. In fact fourth grade math will do just fine.
When you see an advertisement for a trading system that says it is 90 % accurate, you can file it with your trash and garbage because no such thing exists with appropriate testing. You cannot get 90% accuracy out of data that is predominantly random. Garbage in and garbage out.
SYSTEMATIC TRADING IS HOW TO TRADE
Keep your stock trading system simple and you can be a rich trader. When dealing with market data that is predominantly random the only way to get to the part that is slightly predictable is to stick with the simplest ideas with the fewest parameters.
Let me give you an example of a stock market trading system with few parameters. At the close of a market day you take the LOW of the day and subtract it from the HIGH of the day. Next you take half of that value and add it to the CLOSE. So let us say that on Monday WUZOO makes a high of 20, a low of 10 and closes at 14. Then we will subtract 10 from 20 to get 10 and take half of that to get 5. Then we will add 5 to 14 to get 19.
The number 19, (.5(H-L)) +C, is the market price to buy on Tuesday. If the buy price is hit on Tuesday you hold the position until the open on Thursday and then you sell it. Thats it. There is nothing more to this simple system with the most limited number of parameters.
BELIEVE IT, SIMPLE MAKES MONEY
I have been doing this kind of market research since 1984 and I am going to tell you that even without programming and testing this simple system, I know this simple system will work. But for the skeptics I will offer some data and test results. Nevertheless I am limiting the amount of data I present here in order to keep this article easier to understand. But if I wanted to prove my theory in a Court of Law I would use more data.
I randomly selected four markets from the top of my list of stocks I traded a while back and arranged alphabetically. The four markets I selected were ADCT, ADSK, AMD, and ABGX.
I tested each market using this simple trading system for one year. I used a formula that commits $10,000 to each trade, hence you buy 2000 shares of a stock trading at $5.00 and you buy 200 shares of a stock trading at $50.00 etc. I tested ADCT, ADSK, and AMD from mid January 2009 to mid January 2010. As a check against correlated markets I tested ABGX from mid August 2000 to mid August 2001.
In the real world of stock market trading and trading on margin you could probably trade all four of these markets at the same time with about $10,000 in cash. Furthermore it is unlikely you would ever get a margin call on a trading system that is out of the trade on the open of the third day. By the time the margin clerk calls you are out of the trade.
This is the net profits from each market: ADCT $2,376, ADSK $2,401, AMD $4,308, ABGX $7,299.
If I put the numbers for all four markets together this is what they look like:
NET PROFIT = $16,385
Gross profit = $35,604
Gross loss = $19,219
Number Trades = 111
Number win = 72
Number loss = 39
% profit = 65%
Average Trade (win loss) = $148
MAX intra-day drawdown = -$2,848
This is pretty decent performance for trading random price behavior. You can repeat this test in all kinds of markets and use data as far back as you want to go and you will get similar results. It is not the Holy Grail, but it does a good job of taming the randomness of the marketplace while protecting your precious trading equity.
A good trader can take this kind of performance and get 100 % annual return on his or her investment. And if you can get 100% annual returns you can become a rich trader.
This kind of system will always work because it is simple and has limited parameters. Dont give this system to a really smart person because they will screw it up!
I have done this kind of trading in real time for over two decades, but I have not yet had to put walls around my house or put up electrified fencing. I will let you in on a dirty little market secret. THERE ARE NO TRADING SECRETS IN THE MARKETPLACE. What I publish here will make no difference in market behavior. I put my stuff on a web site; it makes no difference regarding my system performance.
You can see that this is hardly rocket science. In fact I could come up with four more of these systems that are just as good in any given evening. If I worked on it I could develop about 100 systems like this in a month. I know a couple of the most successful fund managers that do exactly this. If you have $100,000,000 fund to trade you need a lot of trading signals and this approach is perfect.
BUT ALSO PERFECT FOR THE SMALL INVESTOR
This approach works well for the small investor as well.
I like to take advantage of the short term nature of this kind of system and trade a lot of markets with it. With short term stock trading we hit and run, spread our money thinly across many markets and we trade a lot. I am currently managing around 60 stocks with a similar trading system I call “Jordi” and in some of my accounts I do not put more than a thousand dollars into any given trade at a time (that is only $500 traded on margin). and so $20,000 covers the margin requirement for 60 stocks, but I think you could still cover 10 to 12 stocks with only $3,000. But trading 60 stocks gives me a lot of protection against deep draw-down. If you are trading that many markets something good seems to always happen even on bad days.
And that, by the way, is why I would not consider anything but mechanical trading, automated stock trading systems, for trading stocks. I cannot study 70 companies and I cannot watch 70 markets. But I can program these simple systems and let a computer keep track of everything and beep me when I need to buy or sell. I sit in front of computers everyday in my pajamas, drink coffee and clean up. Well most of the time I clean up. Lol.
You as a small investor need not be intimidated by the marketplace. If you develop a simple short term approach to trading and trade it systematically and methodically and with discipline, you can beat the pants off the majority of traders, professional and otherwise. They are the Wall Street Morons. Be your own boss and do it yourself. The marketplace is full of morons and usually the morons make huge salaries and dress and talk smarter than we do. My advice to you, the small investor, is to go after them with solid, systematic, automated trading. And understanding that is among the most important rules of How to Trade.
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